Friday, 31 March 2017

Do you think women should always be paid the same as men for doing
the same job, or can you think of any conditions under which one or the other
should be paid more? Your answer to this question is based on how you perceive
fairness? Let's explore this further.There are usually two kinds of perception of fairness, which we'll
call Fairness A and Fairness B. Fairness A says if workers are treated equally while at the same
time benefiting from their endeavours then we should support a flat tax rate
for all (say 25%). That means that Tom who earns £100,000 per year and Dick who
earns £30,000 per year each pays the same rate of tax, but Tom pays more due to
having higher earnings.

Fairness B says that it's fair to treat people unequally to try to
bring about a fairer equalisation overall. That means that Tom who earns
£100,000 a year and in absolute terms already pays more tax than Dick on
£30,000 per year also pays a higher rate of tax than Dick, because it is seen
as a good thing that high earners, although not often willing to help out
voluntarily, do instead have the compassion to accept or embrace the kind of
taxation that redistributes the top-end money to those with less.

Isn’t our tax system
like that?

Yes, currently it is. Fairness A is often referred to as flat
taxation and Fairness B is often referred to as progressive taxation. Those on
the left tend to prefer progressive tax - but it is hard to be consistently
progressive because people's ideas of fairness are inconsistent. That is to
say, people are clumsy, and they tend to cherry pick between Fairness A and
Fairness B while believing they are sticking firmly to either A or B. If you
asked them whether women should always be paid the same as men for doing the
same job, they'd probably say yes. But then that can go against their
progressive ethos, because there are conditions under which unequal pay for men
and women could be progressive (and, in fact, this once was the case).

For example, a married man with a non-working wife and children
would find it harder to live than a single, childless woman doing the same job.
In fact, it used to be thought to be justified to pay a man more than a woman on
those grounds. Given that once upon a time most men were working breadwinners
and most women were stay-at-home-housewives, it was thought to make sense to
pay men more, as that extra money also benefitted the wife and children.
Whether you think that's good depends on how you view the situation of a
single, childless woman getting paid the same as a married man with a non-working
wife and children. Most people now are proponents of the “equal pay for equal
work” maxim, whereas one hundred years ago those people would have been in the
minority.

The question, then, for proponents of Fairness B is why
they'd support richer people paying a greater rate of tax but not support the
same method of equalisation when it comes to single women being better off than
their male colleague who's married with three children?

One good response might
be that although we’ve been selectively a la carte over the years, we’ve done
so for good reason, because it’s important to adapt to changing landscapes. Now
that more women are working women, the ‘equal pay for equal work’ maxim makes
the previous male-dominated sensibility seem rather outmoded. Another good
response is that tax policies are largely based on buying votes. Creating a tax system
that hits the minority hardest and benefits the majority at their cost is seen
as a good way to buy votes, which is what governments base their tax systems
on. Here's a simple illustration. Imagine you are governor of an island with a
population of 150, and you want to obtain votes for re-election in a democracy.
Out of the population, 100 of those 150 earn £25,000 per year and the other 50
earn £100,000 per year. Your rival governor candidate wants everyone to be free
to spend their own money, and you want all the money to be pooled into a state
pot and shared out evenly among the 150 people.

Under your opponent's
system two thirds get to spend £25,000 and one third gets to spend £100,000. Under
your rule those £25,000 earners who make up the two thirds get to have a share
of the £100,000 earned by the minority group. Under your system everyone in the
two thirds group is £25,000 better off and everyone in the one third group is
£50,000 worse off (for those still counting, each of the population has £50,000
to spend). My prediction is that on Election Day your opponent will obtain one
third of the votes and you'll obtain two thirds.

Before
universal suffrage, the primary voters were men who earned money, so it was
best for the government to adopt a flat rate tax policy. When universal
suffrage came in, things changed, because now there were a lot more votes to
buy, so it made sense to appeal to the majority (the low and medium earners)
against the minority (the high earners) . A political party that promised to
tax the wealthiest people at a higher rate and distribute it to the poorer
people would gain plenty of support, so their policies were tactical.

This
is what we find in the modern age in the UK. In the UK the median income is lower than the average
income, meaning most people earn less than the UK’s average wage. This presents a
tactical no-brainer for political parties; endorse progressive taxation because
then if you tax the wealthiest more than the poorest you bestow gifts on the
majority of the people – which, for most people, basically amounts to voting
for your own gifts.

This all sounds nice;
surely voting for things that you like is a positive thing, and surely a nation
in which the majority benefits from the government’s beneficence is a good
thing too, right?

It
depends how you look at it. If you like efficiency then no, it’s not great,
because it is a recipe for profligacy. The reason being; if you buy something
that’s worth less than it costs, you’ll find lots of wasteful spending. And if
you spend other people’s money you’ll spend it less wisely than if you spend
your own. Free markets are efficient because the product or service price from
a supplier won’t usually be less than its production costs, and it won’t
usually be more than the consumer is willing to pay for it.

In progressive tax
systems things change. Most people reading this Blog will contribute far less
than what would be their average share of a government’s spending policy, which
means their incentive to see prudence and efficiency is diminished. Consider this illustration: Imagine you and I are at a large banquet with 98 other people,
where the richest few are going to pick up the vast majority of the bill, and
what’s left will be split between the rest of us. If everyone decides to have
an extra bottle of wine per person and a supplementary box of chocolates, the
proportion of the wine and chocolates costs with regards the overall bill will
be less for you and I than the value of the wine and chocolates.

So even if we’d
ordinarily not be willing to pay for the extra wine and chocolates, we won’t
mind having it because the cost for us will be significantly less. What’s
worse, there are bound to be lots of stuffed diners who didn’t really want the
wine and chocolates who would not care too much because the majority of the
expense is being taken care of by the richest few. This is what’s happening in
real life with our politics.

Sunday, 26 March 2017

Here we have another
characteristically dodgy article from Duncan Weldon in The Guardian, who
foolishly believes that the way to sort out the public sector crises of
unaffordability is to throw more and more money at them (I argued here that that is the precise opposite of what we
need). Like giving more chips and ice cream to a morbidly obese child, pouring
more money into crisis-ridden services is only going to conceal the deeper
rooted problems, and will consequently make things worse in the end. This is a
point that has been made on here repeatedly in recent times.

What I haven't mentioned
quite so recently is the other big problem seen throughout articles like the
one above - a misunderstanding of who tax actually affects and in what way.
Take, for example, the call for higher corporation tax on the basis that by
taxing big corporations more there will be more to redistribute to struggling
families. It's a simple idea, but like many simple ideas, it is simply wrong.

The main problem is that
the definition is factually inaccurate, because corporations don't actually pay
tax - only individuals pay tax. The cost of corporation tax is primarily borne
by customers (with increased prices of goods or services) or employees (with
decreased wages) to avoid being borne by shareholders (through lower
dividends). Corporations pay tax only in the sense that the cheque or debit is
written in the name of the company. If the cost of taxes ultimately falls on
individuals in the form of higher prices of consumption and lower wages (or in
some cases increased unemployment) then a tax policy that tries to hurt
corporations is simply a tax policy that harms the people the lefties are
trying to help.

Abolishing corporation
tax and taxing at the level of shareholder dividends and high-end consumption
at an increased rate, coupled with a reduction in the top rate of income tax,
would do more to boost the UK
economy than any of the flimsy policies most MPs proffer. But because the
abolition of corporation tax and top rate reductions are about as attractive as
a fart in a space suit to most of the electorate, no political party is brave
enough to implement them.

Another thing not often
realised is that the cost of tax to an individual is greater than the sum of money
paid to the IRS in 1s and 0s. To see why, suppose that the demand for highly
skilled workers like doctors, surgeons, IT directors and financial advisers is
very inelastic. If taxes on high skilled jobs are high, it will reduce numbers
of doctors, surgeons, IT directors and financial advisers, which will mean that
consumers pay the price through higher fees for those services.

Where the demand is
inelastic, high taxes on such workers reduce the number of suitable people
willing to train for those jobs, with the result being that customers in need
of their services bid up their wages at a cost to their own pocket. In other
words, the cost of the tax is a transfer from those that pay the tax to those
that consume the services of those in the high skilled industry.

A similar issue arises
with the minimum wage, where the state-enforced increased cost to employers is
a cost that is passed on to consumers with higher prices or fewer jobs.
Further, PAYE taxes (that's income tax and national insurance) are a tax on
labour, which of course means that you get less than the optimum amount of it. Whether
PAYE taxes are paid by the employer (before he pays wages) or by the employee
(when he receives wages) doesn't matter much - they are essentially the same
tax on labour.

The place where the
ultimate burden of tax falls is largely contingent on supply and demand's
elasticity. If the supply of labour is elastic then that means prospective
employees won't be particularly sensitive to wage levels, thereby placing the
burden on employees. If on the other hand employers have to increase wages to
hire good workers then the tax burden falls on the consumers of what those
workers produce.

Income taxes interfere
in the market of trade by diminishing value in society too. This happens
because income tax means there are fewer transactions, as exchanges that would
otherwise benefit both parties now do not take place. Suppose I am willing to
pay no more than £11 per hour to have some work done, and I have some workmen
who are willing to do the work for £10 per hour. That being the case the
transaction should take place and both buyer and seller will be happy with a
£10 an hour hourly rate.

But once the government
imposes 20% income tax, things change, because now the most the workmen can
earn from me in net pay is £8 per hour, which means they'd be unwilling to do
the job for me. In order to satisfy the workmen's earning needs, the 20% income
tax means that the workmen have to charge me £12.50 an hour to clear £10 an
hour. What then transpires is that either the work doesn't get done because I'd
rather not spend that much money, or else I end up doing it myself and making a
much less good job of it.

The upshot of
all this is that tax is not some kind of magic money tree that can be obtained
without negative consequences. People who wish to tax us out of crises usually
miss three vitally important things:

1) Tax
something and you usually get less of that thing, which in many cases means the
nation is worse off by the reduction.

2) Tax
something to bestow benefits to one group of people and you usually find that
what you give to them in one hand you take it out of their other hand a short
time after.

3) Tax
something and you also end up hurting other groups you have usually totally
forgotten about.

Thursday, 23 March 2017

My
favourite blog posts are the ones where I take a common viewpoint held by the
majority of people and explain why it is a myth. Today it is the turn of tax
havens. Thanks to faulty headline-grabbing propaganda, like the latest offering from The Guardian's Richard Murphy (he's the guy behind Corbynomics), most people think tax
havens are outrageous places in which tens of billions of pounds are being
stored offshore, denying UK
citizens valuable tax revenue that could be used on public services like
schools, health care and roads. Nice idea. But like many nice ideas, it veers
far from the truth.

First off,
so what of the complaint that if the money stays in the private sector in tax
havens then UK
citizens are being robbed of vital tax revenue? To answer this, consider if the
money stays in the private sector in a tax haven, who else benefits from that
apart from the person with the money? In the first place, the money is
invested, which generates plenty of jobs and lots of economic growth. And in
the second place, what is less obviously true is that if a UK Billionaire keeps
£500 million in a tax haven then all the time he's not spending it he makes
everyone else in the UK
better off in terms of more resources and lower prices. This is because money
earned but not spent is like conferring a gift to the UK taxpayers.
Moreover, it's important to remember that the primary contribution high earners
make to society is not in the taxes they pay, it is in the goods and services
they produce. Most of these big corporations make small profit margins on each
unit sold - they just sell lots of units, which means they are creating an
awful lot of value to consumers.

When it
comes to tax havens, what is also being missed by a lot of people is that tax
havens actually make us better off in another way, in that they provide vital
competition to tax rates in the UK.
A popular view from the left is that because of tax havens governments have to
increase our taxes to make up for all the tax they are not getting from money
stored in places like the Cayman Islands. In
actual fact, the opposite is true - tax havens keep our UK taxes lower
not higher.

To see why,
suppose there is just one quite expensive Bakery in town (call it Bakery A).
Along comes another Bakery in competition (Bakery B), offering townsfolk lower
prices for bread. The very worst thing that Bakery A could do in response would
be to raise its prices even more. Their best response would be to try to
out-compete Bakery B for custom. This is the nature of competition, and how it
lowers prices and improves efficiency.

Similarly,
tax havens are like Bakery B - their more competitive tax rates place
competitive pressures on governments that might be tempted to tax us highly.
Competition for prices occurs with tax just as it does with bread, laptops and
cars. Governments must be competitive with their tax rates, otherwise more and
more money will be stored in places with lower tax rates. Tax competition is a
key driver of economic growth in the world, as this incentivises politicians to
keep taxes on savings and investments low. When tax rates are excessive, there
is less economic growth. Tax havens provide the necessary competition to
militate against this happening - they are not the bogey that many will have
you believe.

Instead of calling for politicians
to tackle the grave injustices of tax havens, campaigners should be calling for
a more fruitful tax systems here, based on lower rates, reduced complexity and
bureaucracy and increased market freedom.

Wednesday, 15 March 2017

In 1998, inspired by watching a baseball game, the economist
Don Boudreaux wrote a short essay entitled Much
More Than Meets the Eye. It's a neat essay and well worth sharing (I've reprinted
the whole thing below) for the way Boudreaux uses a sporting analogy to
illustrate the widespread presumption of over-simplicity in the economy.

That is, just as the skill and dexterity combined with
lots of practice goes into the prowess of playing baseball, similarly society
and the economy appear to be a
lot simpler and easier to organise than they really are. Because of this,
third party politicians operate under the delusion that they know people's
wants and needs better than the individuals themselves, and can govern their
lives better than they can.

I have to admit, ever since being a young lad and
first getting into those academic subjects like economics that would titillate
and enhance the mind ever since, our sluggishness in evolving
beyond this state of stultifying dependency has struck me as strange. While I understand the human need to help others, I
remain perturbed by how, in a Jack and Jill scenario, we let so many Jacks dictate
to us Jills what our preferences are and how much we should value things.

It remains utterly
peculiar to me how almost everyone loves the idea that Jack knows enough to forcibly
prohibit Jill from selling her labour for lower than the rate that Jack (with
only a tiny fraction of all the facts) establishes is best for Jill. It remains utterly
peculiar to me how almost everyone loves the idea that Jack knows Jill's perceived
trade off in the pleasure of eating chocolate versus the prospect of being a
few grams heavier as a result.

The same applies to Jill's
wine, beer, cigarettes, number of hours she can work, whether she is allowed to
charge the market rate for renting out her apartment in London, and the extent to which supply, demand
and consumer choice ought to be factored in to getting a train, obtaining a
university degree, and so forth (there are still many people who support
nationalisation of railways and the scrapping of tuition fees).

I do sense that market-friendly thinking
is on the rise, and with the mass-sharing of ideas thanks to the global online
connectivity, and with hopefully enough people wanting to reap the benefits of critical
thinking, it would be nice to see this trend continuing. For now though,
there's still quite a way to go.Here's
the short essay…

Much More Than Meets the Eye

Last
October I watched a few telecasts of the Major League baseball playoffs. I
noticed the Atlanta Braves’s all-star pitcher Greg Maddux and asked myself:
“What makes this guy so special?”

I
studied his pitching motion. “It looks like something I could do with a bit of
practice. Why am I not making millions of dollars pitching in the Major
Leagues?”

Of
course, I know that I could never hurl a ball with Maddux’s combination of
speed and accuracy—even if I could mimic very accurately the outward
manifestations of his expert pitching style. Every single pitch delivered by
Maddux is the result of countless precise muscle movements, only a tiny
fraction of which are visible. In short, it is impossible really to observe how
Greg Maddux pitches. All we can observe are a few rough external movements—how
high he raises his leg, how far back he cocks his throwing arm, and so on. If
skilled pitching indeed involved mastery of nothing more than the external
movements every fan sees, then the world would be so awash with skilled
pitchers that Greg Maddux would have to work two jobs to earn enough money to
feed his family.

Maddux’s
unusual expertise is invisible. This expertise is his rare knowledge of how to
coordinate the tens of thousands of sequential minute muscle movements
necessary to get the ball over the plate at lightning speed. Not only can no
observer ever see the complex coordination of indescribably exact muscle
movements in Maddux’s feet, legs, back, shoulders, arms, hands, and fingers,
but Maddux himself could never hope to articulate to even the most perceptive
listener just what he does.

In
fact, we can never really see, or learn by words, how any pitcher pitches. We
see only the surface phenomena—the tip of the iceberg. To watch a big-league
pitcher pitch is to risk being misled into thinking that we see how to pitch.
The actual pitching process is vastly more complicated than anything that can
be observed, measured, recorded, communicated, or mimicked.

In
this way, the market is like adroit pitching: everyone observes the surface
phenomena but no one ever sees the underlying mechanism—invisible in its
entirety—that gets the job done. Not even the most astute economist,
entrepreneur, or financial analyst ever sees more than a sliver of the vast and
intricate invisible workings of the market process that daily transforms raw
materials and human creativity into billions of consumer goods and services.

Leonard
Read explained what he called the “white magic” of the market process in his
justly praised article “I, Pencil.” No one knows how to make an ordinary
pencil; no one can ever know how to make a pencil. And yet pencils are produced
in such huge quantities that they are virtually free for the taking. We have
pencils not because some one person planned from the beginning the cutting of
cedar trees, the mining of graphite, alumina, and bauxite, the extraction of
petroleum and clay, or the organization of transportation to get supplies to
pencil factories and pencils to retailers. When you contemplate the
enormousness of all the tasks that are required to make a single pencil, you
understand that no one can know how to do more than a tiny fraction of these
tasks.

We
have pencils (along with indoor plumbing, electric lighting, microprocessors,
disposable diapers, camcorders, concert halls, . . . ) only because for each of
the countless tasks required for the production and distribution of each good
there are a few people who specialize in knowing how to perform these tasks.
But no one knows—or can know—how to perform all of the tasks required to
produce even the most commonplace of goods. The free market works as well as it
does because, when property rights are respected and fully transferrable, the
resulting prices tell each of the producers at the innumerable different
production “sites” just what (and how much) to produce and with what particular
combination of resources.

For
example, if the supply of crude oil falls, the resulting higher price will
prompt manufacturers of paint to produce less petroleum-based paints and more
linseed-oil or water-based paint. The resulting higher price of petroleum-based
paints will prompt pencil manufacturers to paint fewer of their pencils with
petroleum-based paints and more of their pencils with paints made of substances
other than petroleum. As F. A. Hayek taught, the pencil manufacturer need never
know why the price of petroleum-based paint rose; all that is required for this
manufacturer to act appropriately is for him to conserve on his use of
petroleum-based paint. The higher price of such paint achieves this goal.

Every
hour of every day millions upon millions of specialists around the world adjust
their plans based upon prevailing prices in light of their own unique knowledge
of their specialties. Each of these adjustments, in turn, spawns further price
changes that cause yet others to adjust their plans. This great web of mutual
and continual adjustments allows the free market to deliver the goods (both
literally and figuratively).

But
this web, though we know it exists, is invisible. We see only its surface
phenomena—goods on supermarket shelves, physicians’ offices filled with
magnificent diagnostic equipment, beer trucks making their daily rounds. No one
ever sees the immense expanse of human cooperation across space and time—or the
vision and gumption of entrepreneurs, or the highly specialized skills of
workers—all of which are necessary if we are to enjoy even the most mundane of
modern goods and services.

People
who would plan an economy, or even regulate an industry, commit the cardinal
sin against sound economics: believing that they can consciously improve that
which they cannot hope to know. Just as it is utterly ridiculous for me to
imagine that I can learn to pitch merely by studying videotapes of Greg Maddux,
it is equally ridiculous for politicians or bureaucrats to imagine that they
can improve upon the free market with knowledge only of the tiny part they are
able to observe. Such conceit is toxic for a free society.

Monday, 13 March 2017

In
case you’ve forgotten, I wrote an article back in December explaining why Brexit
must involve leaving the customs union. More recently Ryan Bourne at CapX adds weight to this by alluding to the shocking
12,651 different taxes associated with Common External Tariff (CET), and how
the EU is internally trade liberating but outwardly protectionist, as UK businesses
outside the EU could face two-way tariffs if they import and export
simultaneously.

As we all know, after leaving the EU, the UK will
be able to set its own trade deals in keeping with WTO rules. Given
that the pain of tariffs is entirely self-inflicted – rather like ramming a
broom handle through the spokes of your bike as you’re riding it – the sensible
post-Brexit policy for Philip Hammond and Theresa May will be to
abolish tariffs altogether and allow manufacturing industries to import more cheaply
from anywhere in the world. For as Ryan Bourne points out in the article – a
fact that is utterly pain-inducing:

“The CET,
coupled with non-tariff barriers imposed by the EU, has resulted in
agricultural and manufactured goods prices being around 20 per cent above world
prices.”

This
should tell you two things. Firstly, as I’ve often remarked on here - that
people in the agricultural industry in the developing world are being screwed
over here, unable to compete with the EU’s protectionist racket. And secondly,
we consumers are being screwed over too because we are paying more than the
market value for our goods. Because in case you’ve forgotten, consumption is
the primary benefit of trade.

Remember,
it’s not Steve’s Steel that pays the tariffs to export, it’s the customers of
Steve’s Steel that pay when it is imported. Apparently the EU buys 44% of our
exports, whereas we buy just 7% of theirs, which means they tax themselves a
lot more than we tax ourselves. The alternatives to exporting to the EU are
exporting to non-EU countries or not exporting at all and increasing our
home-grown consumption – both of which are more sensible than taxing ourselves - and the EU countries would be wise to adopt the same approach. The outcome –
tariff-free trade for both parties, and mutual benefits for both importers and
exporters. It’s a no-brainer really.

Friday, 10 March 2017

I see a lot of
headline-grabbing warnings in the media about how activity x, y or z is a huge
danger to a, b or c. They bandy figures around like if you do x you'll be
80% more likely to get this type of cancer, or y increases the risk of a heart
attack in men by 70%, or z makes a more than 5 degree temperature more likely
by 75%.

When stated like that,
activities x, y and z can quite easily cause alarm - and they often do, whether
it's how many cups of tea you drink a day, how often you have a fried
breakfast, how many cars are on the road or whether you smoke in a house with
children - someone has got something to say about it and some stats to throw
at it.

But those figures mean
very little unless you know the base probabilities to begin with. For example,
suppose drinking an extra two cups of tea a day (from, say, 4 to 6 cups)
increases the probability of your getting prostate cancer by 40%. On first
inspection it may sound advisable to stick to the 4 cups of tea a day.

But suppose drinking 4
cups of tea a day only makes your chance of getting prostate cancer 15% - a 40%
increase in probability from 4 cups a day to 6 cups a day only adds another 6%
to your chance, which is still only a 21% chance. You may well feel that all
those extra cups of tea over your lifetime is worth a 6% increase in
probability. However, if you just saw the headline "2 extra cups of tea
increases the chance of prostate cancer by a whopping 40%" then taken at
face value it may put you off tea for life.

We routinely hear claims
of the kind that eating two rashers of bacon a day raises the risk of bowel
cancer by 18%. But without a base rate (how common is bowel cancer?) this
information is not very useful. As it happens, in the UK, bowel cancer affects six out of
100 people; so a bacon-rich diet would cause one additional case of bowel cancer
per 100 people.

Here's another example. Suppose
40 million of the UK
population ticks a yes or no box to say whether they trust the media, and then
the media tries to clean up its act. Next year there is a repeat poll and the
results show an 18% increase in people who now trust the media. At first glance
that sounds like it could be quite a lot of people changing their mind - after
all, 18% of 40 million is 7.2 million people.

But, of course, that's
totally the wrong way to think about it, because we need to know the base rate
- that is, the number of people who trusted the media in the first year.
Apparently the actual figure is that only 6 out of every 100 people say they
trust the media, so an 18% increase the year after is only an extra 1 person in
every 100 now trusting the media.

Numbers are misleading
- they can shock in large quantities, but that often skews the real picture.
When a few years ago Vince Cable projected that our joining the Euro would
increase our GDP by a few billion pounds, lots of Liberal Democrats got
excited, and many pressed for us to join.

What should
have been obvious is that that GDP figure is spread over the entire population
of Britain, and doesn't add up to much at an individual level (for example, 4
billion divided by 63 million works out at just over £60 each). Would you want
to lose the pound sterling for an extra sixty quid in your pocket? (that was
then, of course - now almost every Brit is glad we didn't touch the Euro with a
barge pole).

Yet another example. Imagine
that there is a new illness discovered, colloquially called 'MXDA', the
symptoms of which are swollen hands and occasionally swollen feet (with neither
causing the other, and either can occur independently of the other). With MXDA
swollen hands occur in 99/100 people diagnosed with it. Swollen feet occur in
only 1/100 people diagnosed with it. Consider this question: which of the two
following statements is most probable:

A) George contracted MXDA
and had swollen feet

B) George contracted MXDA and
had swollen feet and swollen hands

The vast majority of
people answer B, even though the answer is obviously A. It's fairly evident
that even though George has swollen feet, there is still a 1 in 100 chance that
he does not have swollen hands, and given that the two probabilities are
independent, it is impossible that B is more probable than A. Belief to the
contrary is known in philosophy as the 'conjunction fallacy'.

Understanding base rates,
probabilities and logical thinking can help us in everyday life decisions too.
Take insuring your household products (a subject I once blogged about here)
Using similar logic to the above thinking, then in terms of probability when it
comes to insurance of household products the cards are stacked in the favour of
the insurer not the insured. It should be fairly evident why: insurers must
cover the cost of pay outs and the administration costs to sell insurance, so
insurance must be a winning hand for the insurer overall (ditto casino owners, bookmakers, amusement arcade owners, and so on - the fact that they are in business at their customers' expense tells us all we need to know).

Should someone who has
spent £20,000 on a conservatory spend an additional £30 to insure against it
being damaged by the weather? The obvious answer seems like yes, but it depends
on the 'base rate' - the odds of the conservatory being damaged by the weather.
If the odds of it being damaged are 1000/1 he'll be £10 down on the deal. Maybe
it's still worth it, but what about £3,000 insurance against a 1000/1 chance
that a £2 million conservatory will be damaged? It's the same as before in
terms of odds and ratio, but our man may think an extra £3000 could be better
spent elsewhere.

One final point, when it
comes to perceived rationality things aren't always as they seem - sometimes
it's important to think a bit further outside the box. For example, generally
it is thought that people who understand probability won't buy a lottery ticket*
because they know the vanishingly small chance of winning the jackpot pretty
much makes any lottery ticket purchase tantamount to a waste of money.

That might be true if
those gambling odds were all there is to the purchase, but there are other
factors that might make a ticket purchase worthwhile, just as there are other
reasons why going for a night out at the casino is not necessarily irrational
despite the probability being in the casino owner's favour. In buying a lottery
ticket you might also be buying the dream and the excitement, which may well be
worth the value, particularly if you enjoy the whole TV show that goes with the
lottery experience. And in case you're wondering, I don't buy a lottery ticket,
I'm not an idiot! Haha! Just kidding!

* I remember reading about the high number of lottery
winners who squander their fortune, some of whom even go bankrupt within a few
years. It could be that the paradox of lottery players is that if they are
willing to spend a few pounds each week on lottery tickets in the first place
they are not likely to be the kind of person who optimises their spending
commensurate with their budget. Therefore, one would expect that a high number
of lottery winners had proclivities for profligacy. "Proclivities for profligacy" - That's one hell of a
statement.

Wednesday, 8 March 2017

In this paper, I will consider supposedly subjective things like taste and opinion and look to challenge long-standing views about their subjectivity - instead attempting to show why they can be thought of as being inextricably related to objectivity.

Monday, 6 March 2017

In the air at the moment
are grave concerns about EU citizens in the UK
and UK
citizens in the EU, and whether both groups will get to securely live where
they want to. To me, the problem smacks of politicians having too much
interference in people's liberties. With increased liberty comes a reduction in
problems concerning free movement of people.

A policy that enforces compulsory
free movement of people also mandates an open borders policy, which most
certainly does not necessarily mean freedom if the policy impinges on the
freedoms of the indigenous population, particularly if it affects their
economic infrastructure.

As with everything, a
market approach to border control and movement of people has to factor in all the costs as well as benefits, and to all groups too. I'm going to assume that
readers will have already worked out the various permutations of who benefits
and who has costs imposed upon them.

For that reason, I'll
assume you can see the obvious corollary, which is that there would be far
fewer problems attached to freedom of movement if so much of a nation's
infrastructure was not tied up in politics and taxpayer-funded state spending.
A nation that has schools, hospitals, social care and welfare paid for by
taxpayers cannot very easily endorse a politically-mandated complete free
movement of people, because of the burden it can place on those taxpayer funded
services (not to mention problems surrounding social and cultural integration).

That is to say, even a
market approach to movement of people has to, for the time being, be consistent
with a level of border control, and the protection of its citizens against
those that damage cultures by not contributing to its economy, or make the
society more divisive, fractionated and vulnerable (with immigration from
Islamic countries being the obvious case in point).

The best way to protect
the liberties of the people contributing to a nation's economy while also
protecting the liberties of people wishing to work wherever they wish is to
have free movement of labour but not have complete free movement of people
(note: I am not talking here about situations involving refugees and asylum
seekers - that is a subject beyond the scope of my intention here).

As long as people are free
to work (and retire, of course) in any country they wish, nations avoid almost
all of the costs of migration and enjoy almost all of the benefits. They have
less chance of suffering from labour shortages, and wage inflation, and
inflexible labour markets - and they enjoy the numerous additional benefits,
which I documented quite comprehensively here.

The problem with having
complete free movement of people disconnected from their ability to work is
that in a bloc like the EU with severe wage differentials there is a strong
pressure for labour migration that has a knock-on negative effect of the
citizens of the wealthiest countries. If all countries in the EU were of a
similar economic standard in terms of wealth and jobs there wouldn't be so much
of a problem.

But a quick Google search
tells me that a Hungarian worker migrating to the UK
could earn in one year here what would take him about four years in Hungary.
For perfectly understandable reasons, the economic incentives for people in
Eastern Europe to seek employment in countries such as the UK, Germany
and France
is far greater than the other way around. Consequently, then, unless everyone
who migrates is guaranteed a job, there will be a disproportionate migration
strain on countries like the UK,
Germany and France.

Because of this, a more
prudent solution would be to tie labour to free movement rights. Rather than
having border controls based on a woolly perception of what the nations
possibly wants, it would be better if they were based on what the nation
definitely needs. I was reading in Forbes that in late 2013, an estimated 13.5%
of points-tested immigrants who had arrived in Australia earlier that year were
unemployed, whereas just 1% of immigrants who arrived by being sponsored by a
company were unemployed.

Clearly, businesses could be much better than politicians
at overseeing a successful migration policy. And as for the matter of the
security of EU citizens already working here, the government would be
absolutely mad to jeopardise their status, and they jolly
well know it.

Wednesday, 1 March 2017

There is nobody more confused in mainstream media at the moment than Paul Mason - a man so bad at economic social commentary that he doesn't even attempt the verbal adroitness required to conceal it. The latest target of his peculiar
anti-growth agenda (and there are plenty) was the complaint about the so-called 'absurd' amounts of money millionaire chief executives
make running their companies compared with the people that buy their products
and use their services. He also gave his usual rant about how the economy is benefiting a few at the top at the expense of the rest of the population. The image above is designed for confused people like Paul Mason.

Alas, the sentiment the wine glasses image evokes is ubiquitously believed to be true - in particular it's a popular complaint from the left, but it rather
skews the reality of what's going on. I will illustrate the point by talking
about supermarkets. The next time you're
feeling disgruntled at the profits of the average supermarket compared with the
real income of the average person, I want you to consider just how much better
off we consumers are because of supermarkets - so much so, in fact, that we do
better out of this than any of the supermarket fat cats.

I was reading in Forbes
recently that families are around £400 a year better off because of the
supermarket price war triggered by the rise of the discount supermarkets like
Aldi and Lidl, thanks to which the competition has driven down food prices at
places like Tesco, Sainsbury's and Morrisons. So it's not simply that shoppers
get more for their money in discount supermarkets, they benefit right across
the board from competition full stop.

I'm asking you to consider
that the supermarket fat cats get a few million quid for their roles, but
families get £400 each! Hang on, I hear you say, £400 is nothing compared with
a few million quid. True, but given that there are around 27 million families/households
in the country, that's £400 x 27 million benefits (which is £10.8 billion
pounds of gain cross-nationally). Moreover, £10.8 billion is
an annual benefit (give or take a few pounds) for consumers, in addition to - and this is
also important - the consumer surplus they receive from all the goods
consumed.

On the other hand, the
supermarket gains are part of a whole range of capital gains that resulted from
years of investment (purchasing the land, building the store, paying solicitors
fees, government fees, etc), and the concomitant capital sums required to keep
the business going to the level it is now, and apply economic duress to
competing firms' prices as they do their bit in society to displace less
efficient businesses.

Not only is there no
injustice in the pay of the executives, what we're seeing quite clearly is that their
influence in the world of retail competition is benefiting consumers in the UK to the tune
of billions of pounds. The above image has got it all wrong; what really happens is that as the top glass gets larger it doesn't just fill the top glass - it fills all the other glasses too. And if you're unsure quite who is possibly overpaid and
who isn't, check out this Blog post here.

About Me

This is the Blog of James Knight - a keen philosophical commentator on many subjects.
My primary areas of interest are: philosophy, economics, politics, mathematics, physics, biology, chemistry, theology, psychology, history, the arts and social commentary.
I also contribute articles to the Adam Smith Institute and the Institute of Economics Affairs.
Hope you enjoy this blog! Always happy to hear from old friends and new!
Email:j.knight423@btinternet.com